Property: Leasehold Covenant essay example

Critically discuss the enforceability of leasehold covenants when the lease and/or the reversion have/has passed to a new owner.

With regards to leases, the date of creation is now pertinent to the running of leasehold covenants, should the tenant or landlord so wish to assign their interest. The enactment of the Landlord and Tenant (Covenants) Act 1995 bought significant and substantial changes to the previous rules on leases but unfortunately, despite attempts by the Law Commission, the new legislation cannot act retrospectively, meaning that leaseholds created prior to 1/1/1996 are treated differently to those created thereafter. This essay will begin by addressing the pre 1996 rules and will then move onto the post 1996 rules before evaluating their subsequent effect. For clarification, all leases before the Act will be referred to as ‘old leases’ and all leases after the Act as ‘new leases’.

Under old leases, 2 conditions were required in order for a lease to run with the land on assignment. Firstly, privity of estate (the relationship between a landlord and tenant whereby they may impose obligations on one another even in the absence of privity of contract); and secondly, ‘touch and concern’ the land (where the covenant relates to the demised premises rather than to a specific person) as governed by “Spencer’s case”, where a covenant to build a brick wall on the leased premises could bind the new owner because the wall would touch and concern the land. Lord Oliver in P+A Swift Investments said that ‘touch and concern’ required the covenant to benefit or burden the landlord or tenant; the covenant to affect the nature of the premises; and the covenant to not be personal. Note that for the assignment of a landlord’s reversion, rather than ‘touch and concern’, the covenant was required to ‘have reference to the subject matter of the lease’, although in essence there is little disparity between the two.

Once established, when a tenant agreed to a covenant, he was not just promising to keep the terms of the lease, but also guaranteeing that any assignee would also adhere to those terms. In other words, the tenant was accepting liability for any breach committed by his own actions or the actions of his assignees or successors. Most leases would expressly state this term, but s.79 LPA ensured that where the parties omitted to expressly state liability, it would be implied by statute. This was the case even where the tenant disposed of his entire estate, as per Thursby v Plant. It’s worth noting that LDF v Avonridge Property established that tenant or landlord may expressly exclude liability where all parties were in agreement, although this is very rare because neither party want to suffer the repercussions of a breach without having a direct remedy through litigation.

Thankfully, following a much needed reform, the new legislation was enacted – referred to hereafter as the ‘1995 Act’. It is suggested that the reform was proposed in the 1980s when economic hardships were rife and the old leases were particularly harsh on original owners, who were forced to cover damages when their assignees failed to pay rent. Dixon, writing for the Conveyancer and Property Lawyer journal states that the new Act sought to eliminate some of the discrepancies between the contractual and proprietary elements of a lease; however the Mashru case has demonstrated that the Act hasn’t been entirely successful in this regard.

The 1995 Act removed the existing rules and replaced them with ‘landlord covenants’ and ‘tenant covenants’, found under s.28(1). The requirement for touch and concern was removed in its entirety and s.5 of the Act states that when the tenant assigns his lease, he is released from both burden and benefit of the covenants attached to the estate; although personal covenants will continue to bind the original parties as found in BHP Petroleum v Chesterfield and now codified in s.3 (6)(a). City of London Corp v Fell established that every single time an individual passes over property, he will give up all benefits and burdens to the new owner; for example, where an assignee decides to re-assign and that assignee then assigns again. In addition, the 1995 Act provides that the s.79 LPA provision will not apply to new leases as they are immune from implied covenants on liability.

Interestingly, above it was mentioned that under s.5 the tenant will be released from his obligations when he assigns the lease to a new owner, however s.6 connotes that landlords are not afforded the same level of ease when attempting to avoid liability, and perhaps for good reason. The landlord has the arduous task of gaining the tenant’s consent for release, complying with the procedures under s.8, or else applying to the courts. This has the effect of giving the tenant some power over the person providing him with accommodation. This may seem harsh on the landlord, who is acting, for all intents and purposes, bona fide, however without those powers the tenant could potentially be left homeless under the control of a new landlord. MacKenzie and Phillips remind us that whilst the landlord can have some say in the tenant’s choice of assignee, the tenant will have no say in the landlord’s choice of assignee even where he is not credit-worthy. Thus the s.6 provision appears justified.

Moreover, the landlord, in controlling the choice of assignee, may require the original tenant to sign an authorised guarantee agreement (AGAs), as per s.18. Dollar, writing for the Landlord and Tenant Review journal, states that s.22 of the Act allows for the landlord to be unreasonable in his desire for an AGA; this made the provision the most controversial and debated by the Houses of Parliament. Neuberger J has since stated that it seems unattractive that the landlord should be entitled to be unreasonable. The tenant’s signature is indicative of his promise to ensure the assignee will fulfil the necessary obligations; thus reinstating the liability which the new Act had aimed to alleviate. It is to be noted however, that although the tenant will hence be liable for his assignee, he will not be liable for any subsequent assignees. For example, where T assigns to A1 who assigns to A2 who assigns to A3; T can only ever be liable for A1. Furthermore, the Good Harvest v Centaur case demonstrated that the tenant’s guarantor cannot be expected to guarantee the obligations of anyone except the tenant he made the agreement for, relying on s.25 of the Act. The new Act has also provided provisions for the protection of the tenant, such as the fact that the landlord can only take action against the former tenant within 6 months of any money becoming due; the landlord cannot enforce against the original tenant any changes to the covenant made after his assignment; and finally, the former tenant may apply for an ‘overriding lease’, thus making himself the immediate landlord of the current assignee tenant.

In conclusion, although prima facie it may appear that the Act has made significant changes to the rights of landlords and tenants who wish to assign their interest, in releasing them from ongoing, onerous liability, the ability of landlords to enforce AGAs has inevitably reduced the rights of the tenant. What the Act does do is make provisions for both parties substantially more reasonable so that whilst they may not still be entirely immune from liability after assigning a lease or reversion, the extent and nature of that burden is not cumbersome. Although individual parties may have hoped for a clause which provides complete immunity from legal accountability, this would not work in practise and ultimately encouraging tenants to take responsibility for their decisions in handing over the leasehold (or in the landlord’s case, the reversion), albeit on much fairer grounds, will inevitably produce a positive outcome for property law as a whole.